Financial controls: The top 5 every company needs - eftsure (2024)

Financial controls definition

According to the Corporate Financial Institute, financial controls are defined as the processes and procedures put in place to manage an organisation’s financial resources. There are various types of financial controls that businesses can implement, such as internal audits, segregation of duties and procure-to-pay procedures.

Key components of financial controls include:

• Monitoring cash flow projections
• Analysing balance sheets and income statements
• Reconciling accounts payable and receivable records
• Ensuring compliance with regulatory requirements

Implementing financial controls helps businesses identify potential risks and make informed decisions about resource allocation. Aligning financial controls with a cybersecurity strategy can also mitigate the risk of cyber-crime.

They form a crucial part of visibility, too, providing leaders with more accurate financial data and helping them make better decisions about resource allocation or risks.

Why are financial controls necessary?

Financial controls are essential for businesses to achieve financial stability and success. Mitigating fraud and errors is one of the primary reasons why financial controls are important. By implementing internal control policies, companies can reduce the risk of fraudulent activities that may harm their financial statements or accounting processes.

Ensuring compliance with regulations and laws is another reason why financial controls are vital. Companies need to maintain accurate accounting records under various regulatory bodies such as the Australian Transaction Reports and Analysis Centre (AUSTRAC) or Australian Taxation Office (ATO). Failure to comply with these regulations could result in severe legal repercussions for a business.

Lastly, improving overall business performance is an additional benefit of effective financial control implementation. By having reliable financial information on hand, leaders can make better-informed decisions that ultimately lead to more sustainable growth over time.

Types of financial controls

Financial controls can be broadly classified into three main types: preventive, detective, and corrective controls. Each type plays a crucial role in protecting an organisation’s financial integrity by addressing potential risks at different stages of the financial process.

Preventive controls

Preventive controls are all about stopping errors or fraud before they happen. These proactive measures enforce policies and procedures to keep things on the right track. Examples of preventive controls include:

• Segregation of duties: Making sure that no single person has control over all aspects of a financial transaction. This helps prevent fraud and errors by sharing responsibilities among multiple people.
• Authorisation and approval processes: Requiring approvals from designated personnel for financial transactions. This ensures that only authorised individuals can initiate or approve significant financial activities.
• Access controls: Limiting access to financial systems and data to authorised personnel only. This helps protect sensitive information and prevents unauthorised actions.

Detective controls

Detective controls are designed to find and uncover errors or fraud that have already occurred. These controls provide a way to detect issues so that corrective actions can be taken promptly. Examples of detective controls include:

• Reconciliations: Comparing financial records from different sources (like a bank statement or general ledger) to identify discrepancies and ensure accuracy.
• Internal audits: Regularly reviewing and assessing financial records and accounting processes to detect errors, irregularities, or non-compliance with policies.
• Variance analysis: Analysing differences between actual financial performance and budgeted or forecasted amounts to identify unexpected variances.

Corrective controls

Corrective controls are measures taken to fix identified issues and prevent them from happening again. These controls focus on addressing problems that have been detected and implementing solutions to mitigate future risks. Examples of corrective controls include:

• Error correction procedures: Establishing processes for correcting identified errors in financial records, such as journal entries or adjustments.
• Policy revisions: Updating and improving financial policies and procedures based on lessons learned from detected issues.
• Training and education: Providing training programs for employees to enhance their understanding of financial controls and improve their ability to prevent and detect errors or fraud.

By implementing a combination of preventive, detective, and corrective controls, organisations can create a comprehensive financial control framework that minimises risks, ensures accuracy, and promotes financial stability.

Five financial control systems examples

All financial leaders need to be designing, implementing and continuously reassessing the internal controls that keep workflows moving and financial risks low. So what are the five essential financial management controls that every business needs to implement?

1. Segregation of duties

Segregation of duties is one of your strongest defences against fraud and errors in financial processes. This involves assigning different tasks to separate individuals, preventing any single individual from exercising control over the entire financial process and dispersing accountability across multiple employees. Basically, it helps catch errors and makes it harder for malicious actors to go undetected, since you’d need a department-wide conspiracy to circumvent the control.

To effectively implement segregation of duties, consider the following:

• Identify key financial processes and associated tasks
• Assign duties to a single individual or department
• Ensure that no one person has complete control over any single financial process
• Regularly reviewing and updating your segregation of duties procedures

2. Internal auditing

Internal auditing helps identify potential errors or fraudulent activities before they become major problems, along with the vulnerabilities that could expose your business to those financial risks. An internal auditor assesses the effectiveness of existing financial controls and recommends improvements where necessary.

Internal audits should be performed regularly to ensure that all financial records are accurate and up-to-date.

The audit process includes reviewing transactions, examining supporting documents, verifying account balances, assessing compliance with laws and regulations and identifying risks that could impact the organisation’s financial health.

By implementing a comprehensive internal audit program, businesses can enhance their overall risk management strategies and safeguard against losses or damages caused by fraud or other forms of misconduct.

3. Budgeting and forecasting

Budgeting and forecasting are critical financial controls that every business leader must implement to ensure the company’s long-term success. Without them, companies can easily overspend or fail to allocate resources effectively.

Here are some best practices to keep in mind when implementing budgeting and forecasting:

• Set realistic goals. When setting your forecasts and annual budget, be realistic about what you can achieve given your current resources
• Use historical data. Analyse past performance trends to create more accurate projections for future periods
• Monitor regularly. Regularly review budgets versus actuals and adjust as necessary based on performance

Remember, the purpose of budgeting and forecasting is not just for compliance purposes but also to help leaders make informed decisions on how to allocate resources.

4. Reconciliation

A robust reconciliation process helps accounts payable teams prevent errors, omissions and fraud while enabling prompt detection of any discrepancies that might come up. It involves comparing data from different sources such as bank statements, ledgers, invoices or receipts to identify any inconsistencies.

By reconciling accounts regularly and promptly investigating any variances identified during the process, businesses can improve other internal controls and safeguard against financial risks.

Business leaders also need periodic reviews of their reconciliation processes to ensure continuous improvement in identifying potential vulnerabilities in the accounting system. These reviews should be conducted by independent auditors who have no direct involvement in the day-to-day operations of accounting activities within your organisation. This way, organisations can get insights into potential areas for improvement while enhancing transparency and accountability throughout all financial control implementation practices.

5. Cash management

Effective cash management is essential for any business to succeed. Here are some key strategies to consider:

• Regularly monitoring and forecasting cash flow
• Creating a policy for handling cash transactions, including deposits, withdrawals and reconciliations
• Establishing protocols for petty cash disbursem*nts and reimbursem*nts

By implementing these financial controls, businesses can ensure that they have the necessary funds on hand when needed while minimising the risk of fraud or misappropriation of funds. Additionally, effective cash management can help businesses make informed decisions about investments or other major expenditures.

Implementing financial processes and controls

One of the most crucial steps in implementing financial controls is identifying risks. This involves conducting a thorough assessment of your business processes to identify potential areas where fraud or errors may occur. Once you have identified these risks, you can then prioritise them and develop appropriate controls to mitigate them.

Another key aspect of implementing financial controls is designing and implementing the actual controls themselves. It’s important to ensure that these controls are tailored specifically to address the identified risks, while also being practical and feasible for employees to follow. This may involve developing policies and procedures, establishing segregation of duties or implementing technological solutions such as automated monitoring tools.

Step 1: Identify financial risk

Assessing potential financial risk is an essential step in implementing effective financial controls. To identify these risks, it’s necessary to evaluate the current financial processes and pinpoint areas of vulnerability. Once identified, determining the likelihood and impact of these risks can help prioritise which ones require immediate attention. By frontloading this process, businesses can proactively manage their finances and avoid costly mistakes.

Whether it’s through internal or external factors, understanding where vulnerabilities exist helps create targeted internal control procedures that mitigate fraud risks. It also allows organisations to better allocate resources towards addressing those vulnerabilities (and with greater precision).

Determining the likelihood and impact of financial risks is key when creating a comprehensive control plan, since different types of risks may have varying degrees of consequences. This vital piece of information helps leaders make informed decisions about prioritising certain controls over others.

Step 2: Evaluate financial control measures

Reviewing existing controls is a crucial step in ensuring that your financial controls are working effectively. Pressure testing, auditing and regular reevaluation can all help you determine if controls are still adequate or need improvement. You may simply need to update certain parts of a financial process, or you might need a new approach altogether – regular review can help you figure out which path is best.

When you’re taking on this process, keep in mind that your controls are likely to fall into one of these categories:

• Detective controls
• Preventive controls
• Corrective controls

You should also ensure that these control procedures are designed and implemented with consideration for the nature and scale of business operations. By carefully assessing all relevant factors during this step, you’re more likely to safeguard your organisation’s assets against fraudulent activities.

Step 3: Design and implement financial control framework

To ensure effective financial controls, the next step is developing and implementing new control procedures and policies that address any identified gaps. This involves a thorough review of existing accounting processes, identifying areas for improvements and rolling out new measures to mitigate potential risks. Plus, organisations will have to craft their control framework with an eye for compliance with legal requirements and industry standards.

Implementing new control measures requires a careful balancing act between effectiveness and practicality. Financial leaders need to assess the impact of any proposed changes on business operations while ensuring that controls are robust enough to prevent fraudulent activity or errors within the system. Furthermore, every decision made during this process should align with legal requirements and industry standards for financial controls.

Ensuring compliance with all applicable laws and regulations is critical in maintaining strong financial controls. Compliance includes adhering to local regulations regarding accounting principles such as GAAP (Generally Accepted Accounting Principles). Businesses need to follow these rules and stay up-to-date on recent developments to avoid any potential issues down the line.

Step 4: Monitor and review financial control procedures

Regular monitoring and review of financial controls are critical to ensure their effectiveness. This step involves tracking the performance of controls against established benchmarks, identifying weaknesses or gaps in the control system, and making necessary adjustments. Financial leaders need to allocate adequate resources for this activity as it helps them stay ahead of emerging risks and adapt quickly to changing business conditions.

It is important to involve all stakeholders in the monitoring and review process, including internal auditors, finance teams, risk management professionals and external advisors where necessary. The insights gained from regular reviews can help improve overall business performance by highlighting areas that require attention while also ensuring compliance with regulatory requirements.

Financial controls checklist

Implementing robust financial controls is crucial for any organisation. To ensure you’re covering all bases, here’s a checklist of essential financial controls:

1. Perform risk assessment

• Conduct thorough risk assessments at least annually
• Identify potential risks and vulnerabilities in financial processes
• Collaborate between management and IT teams on risk assessment
• Document and analyse control procedures
• Regularly train stakeholders on control hygiene

2. Design financial control objectives

• Establish control objectives aligned with organisational goals and values
• Implement safeguarding measures for financial assets
• Ensure data integrity through efficient controls
• Prevent unauthorised transactions with appropriate measures

3. Identify protective financial controls

• Implement segregation of duties
• Establish access controls for sensitive information and systems
• Set up pre-approval processes for actions and transactions
• Document policies and procedures clearly
• Conduct training and fraud awareness programs

4. Implement detective financial controls

• Utilise data analytics and monitoring tools
• Perform regular financial reviews
• Conduct internal and external audits

5. Implement corrective financial controls

• Establish incident reporting and investigation procedures
• Implement fair and consistent disciplinary measures
• Regularly apply software patches and updates

6. Document financial control policies and procedures

• Clearly document policies and procedures for each control
• Specify responsibilities, processes, and guidelines
• Ensure documentation is accessible and understandable
• Provide step-by-step guidelines for control activities

7. Implement financial control activities

• Develop a comprehensive implementation plan
• Consider dependencies, challenges, and cross-team coordination

8. Monitor and evaluate financial controls

• Conduct regular internal audits
• Leverage data analysis techniques
• Define and track relevant Key Performance Indicators (KPIs)

9. Review and improve financial controls

• Conduct annual comprehensive reviews
• Implement continuous monitoring processes
• Align reviews with internal audit cycles
• Incorporate feedback and incident analysis
• Continually refine and improve controls

By following this checklist, organisations can establish a robust financial control framework, adapt to evolving risks, and maintain the integrity of their financial processes.

Financial controls best practices

To maximise the effectiveness of your financial controls, consider implementing these best practices:

Foster a culture of compliance: Encourage all employees to understand and value the importance of financial controls. This helps in maintaining robust corporate governance.

Provide ongoing training: Regularly educate staff on financial control procedures and updates. This includes training on internal control procedures and accounting principles.

Leverage technology: Implement software solutions that automate and streamline control processes, such as your accounting system and financial reporting tools.

Conduct risk assessments: Regularly evaluate and prioritise financial risks to focus control efforts. This includes assessing internal controls and potential vulnerabilities in your financial processes.

Document processes: Maintain clear, up-to-date documentation of all financial control procedures, such as those related to internal audits and accounts payable.

Encourage reporting: Establish a system for employees to report suspected fraud or control weaknesses, ensuring transparency in your financial records and business processes.

Adapt to change: Regularly review and update controls to address evolving business needs and risks. This includes updating your financial statements and cash flow projections.

Implement strong password policies: Ensure all financial systems have robust password requirements to protect sensitive financial data.

Perform surprise audits: Conduct unexpected checks, such as reviewing bank statements and internal audits, to keep employees vigilant and identify issues.

Seek external expertise: Consider engaging external auditors or consultants to assess your financial control environment and accounting records independently.

By following these best practices, you can create a robust financial control environment that protects your organisation’s assets, ensures accurate financial reporting, and maintains stakeholder trust.

Financial controls software solutions and monitoring tools

In today’s digital age, leveraging technology is crucial for effective financial control implementation. Here are some software solutions and monitoring tools that can enhance your financial control processes:

Enterprise Resource Planning (ERP) systems: Integrate various business processes and provide a centralised platform for financial control, including financial reporting and management controls.

Accounting software: Automate bookkeeping tasks and generate accurate financial reports, ensuring compliance with accounting principles.

Expense management tools: Streamline expense reporting, approval, and reimbursem*nt processes to maintain accurate financial records.

Fraud detection software: Use AI and machine learning to identify suspicious transactions and patterns, serving as a critical detective control.

Compliance management systems: Track regulatory requirements and ensure adherence to financial regulations, supporting robust corporate governance.

Data analytics tools: Analyse large volumes of financial data to identify trends and anomalies, improving financial management and decision-making.

Workflow automation software: Streamline approval processes and ensure proper segregation of duties to enhance internal controls.

Cloud-based financial management systems: Provide real-time access to financial data and enhance collaboration, supporting effective cash flow management.

Audit management software: Plan, execute, and report on internal audits more efficiently, ensuring thorough internal control procedures.

Cash flow forecasting tools: Improve accuracy in predicting future cash positions and financial needs, helping maintain a healthy balance sheet and financial statements.

When selecting financial control software, consider your organisation’s specific needs, scalability requirements, and integration capabilities with existing systems.

In the modern financial landscape, automation has become a pivotal strategy for enhancing efficiency and accuracy in financial management. Automating financial controls monitoring and implementing financial controls automation can significantly bolster an organisation’s ability to manage risks and ensure compliance.

Automate financial controls monitoring

Financial controls automation involves using tools like Eftsure to streamline and standardise financial processes, reducing the need for manual intervention. This not only improves efficiency but also enhances the reliability of financial controls. Key areas where financial controls automation can be applied include:

Expense management: Automating the expense approval and reimbursem*nt process ensures compliance with company policies and provides a clear audit trail, supporting effective financial management.

Transaction approval workflows: Automated workflows for transaction approvals ensure that all necessary checks are performed without delays, maintaining the integrity of financial transactions and financial records.

Reconciliation processes: Automated reconciliation tools can quickly match transactions from different sources, such as bank statements and ledgers, identifying and resolving discrepancies efficiently to maintain accurate financial statements.